What happened last week
- Softening Economic Data: Cooler than expected inflation data weighed on interest rates; September rate cut now the base case.
- Equity Markets Broadened: Investors rotated in favor of small caps and value at the expense of large-cap growth.
- Trump Assassination Attempt: Market odds improve for a Trump win and a Republican sweep following the tragic events of this weekend.
What we’re watching this week
- U.S. Politics: All eyes are on this week’s Republican National Convention as investors pull forward their election trade timeline.
- Monetary Policy and Data: Speeches from Powell and Waller, a policy meeting from the European Central Bank (ECB), and retail sales will impact rate pricing.
- Internationals: China holds an important policy meeting, with demand-side stimulus a potential driver of improved investor sentiment.
Horizon’s Investment Management Views
A weaker than expected print for inflation, including the long-awaited arrival of an easing to the housing component of CPI, was last week’s major market news. Bonds reacted in a straightforward manner; interest rates fell and earlier expectations for cuts solidified around a September start for the Fed’s easing cycle. The stock market reaction to Thursday’s CPI was more confusing, however, as the S&P 500 and NASDAQ 100 both declined while small caps had their best day since the fourth quarter of last year. We think this reaction was due to investor positioning. The incredible mega-cap dominance that has characterized the U.S. equity market since June had to be unwound to make way for what investors would want to own if the Fed easing cycle is going to start in September. Friday’s price action saw a bit of a recovery, and the S&P 500 still notched gains of almost 1% last week, but we could be in store for a bit more volatility as investors assess the incoming earnings information and adjust their views around Fed policy in the coming weeks.
Politics was the other main story investors were following last week, but there is little to suggest that the news cycle contributed to the market action. Continued pressure on President Biden from some Democrats and many in the media was met with defiance from the White House. The weekend’s news of an assassination attempt at a rally for former President Trump in Pennsylvania further complicates the political picture and injects greater uncertainty into the mix.
Turning to this week, the Republican National Convention begins on Monday with Trump likely making his first spoken remarks since the assassination attempt. Monetary catalysts include speeches from Fed Chair Powell and Fed Governor Waller and an ECB meeting. On the data front, Tuesday’s retail sales is an important check on the consumer. Internationally, China’s Third Plenum policy meeting will be closely watched for potential demand-side stimulus.
The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. The Nasdaq-100 is a stock market index made up of equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
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